Global stock markets are facing fresh headwinds, with analysts at Morgan Stanley warning that the worst of the downturn might not be over. Concerns about the escalating conflict in Iran are weighing heavily on investor sentiment, disrupting oil flows, and fanning inflation fears across major economies. This has prompted a broad sell-off in some regions, leaving many wondering if now's the time to buy the dip or brace for more pain.

Australian Market Feels the Squeeze

The Australian sharemarket, a key bellwether for the Asia-Pacific region, endured a gloomy Tuesday session. The S&P/ASX 200 fell by 123.60 points, a 1.3 per cent drop, closing at 9077.30. It was a broad-based sell-off, really – nearly all 11 industry sectors were in the red, with only energy and consumer staples managing to hold their ground.

This big move came as worries grew about the Iran war dragging on. Thing is, a prolonged conflict could clog up the flow of oil, mess with global transport, and make inflation even worse. And that's not good news for businesses or consumers.

Companies that rely on consumer spending, along with travel stocks and miners, all saw significant declines. Mining giants like BHP, Fortescue Metals, and Rio Tinto finished down 2.6 per cent, 4.5 per cent, and 2.4 per cent, respectively, as concerns mounted over the war's fallout for the global economy.

Northern Star Resources fell 3.2 per cent, Newmont lost 2 per cent, and Evolution Mining slumped 4.5 per cent, even after a recent rally in gold prices moderated. Bullion had climbed as much as 0.9 per cent to about $US5360 an ounce, adding more than 3 per cent over the previous four sessions.

Bond yields also went up. That's because fears of surging energy costs fanning inflation curtailed any hopes for quick rate cuts in the world's largest economy.

Traders are now pricing in a first US rate cut in September, with bets on a third reduction this year fading fast.

Mastheads

Chris Larkin, from E*Trade from Morgan Stanley, summed up the mood rather well. "There are more questions than answers right now," he said. He added that while a stabilising energy picture could have a positive ripple effect, worries about a longer-term disruption could have the opposite impact. Wall Street futures suggested further falls when trading opened in New York, with the S&P 500 Index and Nasdaq 100 futures down 0.8 per cent and 1 per cent respectively at the end of the Australian trading day.

Morgan Stanley Predicts Deeper US Market Pain

Meanwhile, on the other side of the world, Morgan Stanley's top strategists aren't holding back on their bearish outlook for US equities. Mike Wilson, the bank's Chief Investment Officer and chief US equity strategist, believes the stock market hasn't hit bottom yet.

He's predicting more pain, with stocks possibly tumbling as much as 7 per cent before the current sell-off ends early next quarter. Wilson argues that market corrections usually don't finish until the "best" companies and "highest quality" indexes take a real hit. And, according to him, that hasn't happened with the S&P 500's latest dip, which is only down 1 per cent for the year.

"While much of the damage has likely been done to the most vulnerable parts of the equity market, the index remains vulnerable to another 5%-7% downside in my opinion," Wilson stated on the bank's "Thoughts on the Market" podcast. He also suggested that "crowded stocks could see double digit declines before a final low appears next month."

He drew a comparison to last year when equities tanked around 20 per cent after President Donald Trump introduced a slate of reciprocal tariffs. The S&P 500's losses this year, despite heightened volatility from AI fears and geopolitical conflict, haven't been nearly as devastating. This year-over-year comparison is key, he thinks, for figuring out support levels for the index. Based on this, and other technical indicators, Wilson suggests the S&P 500 could trade towards 6,300 by early April.

But it's not all doom and gloom from Wilson. He also sees several catalysts that could push the market higher beyond the short-term downside. He pointed to broad earnings growth in the market and the fact that the US is more insulated from oil-price shocks compared to Asia and Europe. Plus, fiscal policies in the "One Big Beautiful Bill Act" could help offset the impact of higher oil prices in the short run. His advice? "Remember, market lows happen faster than tops, so be ready to add risk in anticipation of the bull market resuming later this year."

Divided Views on "Buying the Dip"

This market turbulence has naturally led to a split among analysts on whether investors should view the current dip as a buying opportunity or stay cautious. Goldman Sachs strategists, for instance, are taking a more optimistic view.

Peter Oppenheimer from Goldman Sachs believes that while correction risks are high due to current valuations, any dips caused by the Iran War or AI fears might represent a chance to enter the market. He doesn't expect a protracted and deep bear market, noting that most geopolitical shocks in recent years haven't had a long-lasting impact on markets. Indeed, many investors seem to be following this advice, with the S&P 500 making a sharp recovery from Tuesday's lows.

Hang on though — JP Morgan sees it differently. Their analysts remain "tactically cautious," suggesting it's too early to sound the "all clear." They expect a relief rally but think the market will fade until there's a clear resolution to the conflict, which they find hard to visualise given the shifting US objectives and ongoing escalation. The bank reportedly advised clients to go long on the dollar and energy, and also highlighted aerospace and defence stocks as potential beneficiaries of the ongoing conflict in the Gulf.

Mislav Matejka, also at JP Morgan, offered a detailed perspective. He acknowledged that the "dramatic weekend events will naturally lead to risk-off behaviour." But he also suggested that if one has a time horizon longer than the next few days or weeks, they should use the weakness to add exposure to risk assets, as market fundamentals remain positive. The Fear and Greed Index currently indicates the market is gripped by fear, yet investors still piled into Tuesday's dip, showing that underlying confidence remains for some.

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The ripple effect of the Iran conflict, from oil prices to supply chains, is clearly creating a complex picture for global equities. With strategists at major banks offering starkly different short-term outlooks, investors face a tricky decision on whether to follow Morgan Stanley's caution or embrace the 'buy the dip' philosophy.

This article was created with AI assistance.